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Friday, November 14, 2008

RBA prepared to cut rates: economists

The Reserve Bank of Australia (RBA) is set cut interest rates further as sluggish global growth threatens to push the domestic economy into recession, economists say.

Central bank policy makers expect inflation to peak by the end of 2008, but a weaker Australian dollar is tipped to delay the moderation in price pressures.
The RBA said on Monday it expects the Australian economy to grow by an annual pace of 1.5 per cent in the year to June 2009.
Just three months ago, it was forecasting yearly gross domestic product (GDP) growth of 2.25 per cent for the same period.
"Much of the softening in growth is expected to be felt in a slower pace of domestic spending," the RBA said in its quarterly statement on monetary policy.
JPMorgan chief economist Stephen Walters said the Australian economy was headed for a recession despite aggressive rate cuts from the RBA.
"The aggressive rate cuts, coupled with the government's `deployment' of the budget surplus, will provide a cushion for the economy, not prevent recession," Mr Walters said.
The RBA said a more rapid unwinding of the resources boom "than has been assumed", a slowdown in China and a fall in commodity prices from their peak would significantly weigh down Australian income.
The RBA also expected annual economic growth to slow to 1.5 per cent by the end of 2008, before climbing to 1.75 per cent in December 2009, and 2.5 per cent a year later.
Commonwealth Bank of Australia senior economist John Peters said the RBA would cut rates by 50 basis points in December - taking the cash rate to a five-year low of 4.75 per cent - as it worried about the downside risk to the domestic economy from the global credit market meltdown.
"The bank will want to get market rates down to levels quickly enough to further limit large downside risks to household spending and housing sector activity, both of which look extremely fragile at present," he said.
Debt future markets expect the cash rate, now at 5.25 per cent, to be slashed by 100 basis points in December, which would take it to 4.25 per cent. It also expects the cash rate to drop to 3.5 per cent by the middle of next year.
Interest rates were cut to 4.25 per cent in late 2001 and have not been lower since the RBA began publishing a target interest rate in 1990.
Complicating rate cut expectations are price pressures, with the RBA expecting a weaker Australian dollar, now trading under 70 US cents, to delay a moderation in inflation.
The RBA expects underlying inflation to peak at 4.5 per cent at the end of 2008 before receding in 2009.
But inflation is not expected to fall to the top of the RBA's two to three per cent target band until the end of 2010 - six months later than previously forecast.
"With the recent large depreciation of the exchange rate, import prices are expected to rise sharply and tradables inflation will gradually increase," the RBA said.
The RBA said a slowing global and domestic economy, and abating wages pressures, would help bring down inflation over the medium term, but the outlook was uncertain.

(12-Nov-2008)brought to you by aap

Monday, November 3, 2008

Reserve Bank cuts rates by 75 basis points

The Reserve Bank of Australia (RBA) has delivered a pre-Christmas bonus to homeowners with a 75 basis point cut in official interest rates.
The cut, which was bigger than expected, takes the cash interest rate to 5.25 percent, and will shave around $175 per month from repayments on a $350,000 home loan. The official rate has not been at these levels since December 2003.
Treasurer Wayne Swan welcomed the RBA's decision and said that people with the average mortgage had saved more than $400 per month since the current round of rate cuts began.
Besa Deda, chief economist at St George Bank said the cash rate could fall to 4.25 percent. "The longer the credit crisis grips financial markets, the bigger are the downside risks to the world and domestic economies, and therefore, the more easing the RBA will need to do to try to cushion the economic downturn," she said.
Commonwealth Bank lowered its variable rates by 0.58 percent just minutes after the RBA move. The bank's head of retail bank services, Ross McEwan, claimed the bank could not pass on the whole RBA cut. "Unfortunately, as a result of a significant increase in all three elements of our cost of funding over recent weeks, we have not been able to pass on the full amount of this latest decrease in interest rates," he said. "Raising long term funds remains extremely difficult and expensive."
The Reserve Bank's decision comes as the Australian economy begins to slow. House prices are falling at rates not seen since 1977, retail spending has plummeted and the number of jobs being advertised has also fallen.
RBA governor Glenn Stephens said the turmoil in international markets and weakening economies globally had aided the decision to slash rates again.
"In Australia, the overall path of economic activity appears until recently to have been close to what the Board had expected, with a needed moderation in demand occurring after a period of earlier strength," he said. "Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence."
All eyes will now be on the remaining commericial banks and whether they match the RBA's cut by dropping variable home loan rates by 75 basis points.
How much will you save?Your say: are lower rates easing the pressure?
Housing industry lobby group the Housing Industry Association (HIA) said the big cut would encourage more first-time buyers into the housing market. "The interest rate cuts to date, with more potentially to follow, provide an opportunity for many Australians to enter the home ownership market for the first time,” Chris Lamont, HIA's policy chief, said.
Beyond today's cut, opinion is divided on the future outlook for interest rates. Inflation may be showing tentative signs of easing, but it remains high and that may be enough to limit the scope for further rate cuts. The market is pricing in a cash rate of 3.75-4.25 percent by mid next year, but some believe that is optimistic.
"After today’s surprise move, the market now has more than fully priced another 75bpt cut for December," said Michael Blythe, chief economist at Commonwealth Research. "We don’t see the RBA validating this very aggressive pricing. We expect a further 25bps worth of cuts by year end taking the cash rate to 5 percent, and then a pause. If the global economy continues to weaken then the RBA will cut again in 2009."

By Stuart Fagg, ninemsn Money, November 4, 2008